Prioritisation of Retail Exposure in the Credit Risk Standardised Approach – EBA clarifies requirements regarding the granularity criterion

The following article provides a brief overview of how EBA/GL/2026/02 – Guidelines on proportionate diversification methods in retail business pursuant to Article 123(1) of Regulation (EU) No 575/2013 – clarifies the granularity requirement for retail business under the Credit Risk Standardised Approach to (CRSA).

In line with this focus, other aspects of the guidelines are not covered in this blog post.

Regulatory context

In the CRSA, Article 123(3) of CRR III provides for a – preferential – risk weight of 75% in principle for so-called retail exposures. This is based on the consideration that, in the case of granular exposures, unsystematic risk is ‘diversified away’ to a certain extent.

CRR III states in Article 123(1)(c) regarding the granularity requirement:

This inevitably raises the question of when granularity, as defined by the CRR, can be said to apply.
The Basel Committee on Banking Supervision (BCBS) clarifies this in its framework for the standardised approach to credit risk under CRE20, section 20.65(3):

As smaller institutions generally have more concentrated retail portfolios than larger institutions, they would not be able to apply the preferential risk weight to the same extent if the 0.2% criterion were applied in isolation.

Accordingly – and in line with the principle of proportionality set out in Recital 46 of the original CRR of 2013 – the European legislators have, pursuant to Article 123(1) of CRR III, tasked the EBA with drawing up guidelines to „define proportionate diversification methods“.

EBA/CP2024/22 of 11 November 2024 as a consultation paper

In order to fulfil the mandate described, the EBA launched a consultation process in 2024 and actively called on the industry to participate.

In this consultation paper, the EBA had initially favoured a complex so-called „iterative approach“, which would have appealed at best to mathematical connoisseurs. We shall therefore spare you a more detailed review. At the same time, however, it had already considered a so-called „alternative or non-iterative approach“, in which the calculation would be carried out only once instead of through an iterative process.

Why is this worth mentioning? Because, evidently as a result of the consultation, the course has been set from what was originally „complex“ to what is now „simple“. And, incidentally, the threshold for permissible deviations has also been doubled from the original 5% to 10% (see the following remarks)! Or to put it another way: things have certainly moved forward in the consultation process!

EBA/GL/2026/02 of 13 February 2026

What approach does the final version of the EBA Guideline now set out with regard to the diversification method?

Put simply, risk positions that exceed the 0.2% granularity criterion may still be assigned a preferential risk weight. This applies up to a threshold of 10% of the total risk exposures of the retail business.

Here, too, we will spare you the mathematical formulas and instead refer to the numerical example developed by the EBA itself for the explanation:

Step 1 involves calculating the 0.2% threshold – and thus the maximum exposure – below which the entire portfolio is considered diversified. In the EBA’s example sub-portfolio, every exposure exceeding EUR 48 is above the 0.2% threshold (= EUR 24,000 * 0.2%). Consequently, all exposures in subset D exceed the threshold of EUR 48.

Step 2 involves calculating the 10% threshold, which defines the maximum total value of those exposures that exceed the 0.2% threshold. Up to this value, further exposures may therefore also be allocated to the retail portfolio and thus benefit from the preferential risk weight.¹

In the numerical example from the EBA guidelines, the maximum amount is EUR 2,400 (= 24,000 * 10%).

In subsets A, B and C of the example portfolio, no exclusions of risk positions are required, as all exposures are below the granularity threshold of 0.2% = EUR 48.

Furthermore, up to 10% of the portfolio’s total risk position values = EUR 2,400 may exceed the 0.2% threshold. In the example, this means that up to 2,400 EUR in subset D can be considered diversified, which corresponds to 12 risk positions (= 2,400 EUR / 200 EUR)

The portfolio eligible for the preferred risk weight is therefore calculated as follows:

Further implementation

The ‘comply-or-explain’ procedure, under which national supervisory authorities must state their position vis-à-vis the EBA, remains in effect until 19 May 2026. Against our better judgement, we assume that BaFin will issue a ‘comply’ statement, thereby bringing the EBA guidelines into force for German institutions. Even though the exact date of implementation has not yet been specified, we expect implementation to take place in the near future.

The implications for institutions are, on the one hand, procedural in nature = technical implementation of the diversification method. On the other hand, they may also be substantive in terms of the future exposure volume in this risk exposure class and thus the total risk amount (TREA), as well as the regulatory capital requirements and expectations based on this.

The specific implications will, of course, depend on the portfolio structure as well as on the diversification method used to date. As always, an early and proactive analysis of the implications never does any harm…